Security CEO Says Pivoting From Antivirus Will Be ‘Far Easier’ After Billion-Dollar Acquisition

July 7, 2016, 7:21 PM UTC
Day Three Of Mobile World Congress 2015
Gary Kovacs, chief executive officer of AVG Technologies NV, speaks during a keynote session at the Mobile World Congress in Barcelona, Spain, on Wednesday, March 4, 2015. The event, which generates several hundred million euros in revenue for the city of Barcelona each year, also means the world for a week turns its attention back to Europe for the latest in technology, despite a lagging ecosystem. Photographer: Simon Dawson/Bloomberg via Getty Images
Simon Dawson—Bloomberg via Getty Images

AVG Technologies (AVG), a computer security company based in Amsterdam, has agreed to a $1.3 billion acquisition by Avast Software, a rival antivirus firm based in Prague.

The combined company would create the world’s biggest antivirus software firm by number of active users, exceeding even Microsoft’s (MSFT) market share of antivirus technology on consumer devices. The most recent data from software-maker OPSWAT indicates that Avast’s 15% market share plus AVG’s 5% would edge out Microsoft’s 15.9% (a figure that excludes Windows Defender, which is included in Microsoft Windows).

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AVG’s board has already blessed the deal, which involves Avast paying cash for the rival firm. Avast said it planned to finance the acquisition through cash on hand and debt financing provided by lenders Credit Suisse Securities (CSGKF), Jefferies, and UBS (UBS) Investment Bank.

Fortune spoke to Gary Kovacs, chief executive at AVG, about the pending deal. The CEO discussed consolidation in the computer security market, the expansion beyond antivirus software to maintain relevance, a planned reorganization of the combined companies, and the fate of both names under a single roof. (He said the joint company intends to retain both brands—Avast and AVG—for different markets.)

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Kovacs also told Fortune that, if shareholders and regulators approve the deal (expected to close in the fall), he plans to step down at least six months after helping manage the integration of the two firms. You can read the full Q&A below, edited and condensed for clarity.

Fortune: What’s the value of taking AVG private instead of, say, doing a reverse merger and taking Avast public?

Kovacs: We are well down the path of moving from a two product, one platform antivirus company to a multi-product, multi-platform security company. But that pivot forces a lot of different investment decisions that need a longer-term time horizon than just the next quarter, or even the current year. Maintaining the calmness of investors becomes increasingly difficult as we make tradeoffs. Along with that, and complicating it, is the business model shift. As you pivot to a subscription model, that impacts your bookings, which impacts your revenues, which impacts your cash flow, which impacts the forecast. Those changes are very difficult to balance as a public entity.

Consumer security is an industry in consolidation. There are 25-plus vendors all chasing the same market with the same general products and the same marketing. Our thesis has been for years that we’re going to be facing mass consolidation. It is starting. This is certainly one of those deals. As a result, every company has to become far more efficient, far more cost effective. AVG and Avast are going to be able to realize a lot of revenues and cost synergies. Completing that restructuring in a private setting is far easier than doing it in a public setting, where you have to condition every quarter along with it.

How do the two firms plan to make those efficiency gains and consolidate? Will there be headcount reductions?

I would expect that in the combined organization, yes, there are going to be redundancies. Ideally, we’ll find places to grow for some, but definitely not all. We don’t need two of everything in the areas that do overlap. So yes, that does mean that.

What size will the joint entity be?

Together, currently, we’re about 2,100 people. But we have only just announced the definitive agreement. The next phase, within the constructs of what we are legally allowed to discuss, will be about figuring out what the go-forward organization will be. That will be something that’s done over the next couple of months. It’s very important to do it quickly, but we have not begun that process yet.

What will happen to the separate brands?

It will be one company, two brands. The geographic overlap between the two companies’ is not that significant. Avast is strong in South America. We’re strong in North America. Europe is fairly well split up. Together, there’s going to be a wider blanket of coverage in some very important markets. The idea is to recognize the strong brand in each market and just let the two live side-by-side.

So the plan is to continue pushing AVG where it’s strong and Avast where it’s strong?

That is correct.

Antivirus is a tough market to be in right now. Old incumbents like Intel (INTC) Security’s McAfee line and Symantec (SYMC) have been aging out while upstarts like Cylance and Malwarebytes have been gaining marketshare. Avast and AVG are no spring chickens. How do the two companies plan to remain competitive?

A couple of things have happened in the security world. The definition of security has expanded. It used to be that if you had AV (antivirus) and a firewall on the desktop you were good. You felt secure. You felt like you had incorporated the right amount of protection. Today, AV and firewall are just features of a much broader security landscape. We as consumers have come to expect things like VPN (virtual private network) and Wi-Fi encryption and password protection and family protection. At AVG we have been expanding our portfolio. The strategy is to provide a much broader portfolio of security products under a simple UI (user interface). I believe that vision will be carried through into the joint entity so that AV itself is only one feature, it’s no longer the product.

So the intention is to go beyond antivirus?


What other products or features might the joint company extend into?

Even just looking at the AVG portfolio, we’ve been on this path for the last three years. We’ve moved into family safety, protecting your children online through services delivered through AT&T (T), Verizon (VZ), Sprint (S), T-Mobile (TMUS)—being able to put a cyber fence around where your children go. We have products that protect your Wi-Fi when you’re exposed in public places. We have VPN technologies. These are all incorporated into the same general product that was historically antivirus. We provide that across Google (GOOG) Android, Apple (AAPL) Mac, desktop, PC. Once you sign in you’re protected everywhere. This kind of broad coverage is really what’s resonating with users today.

In order to finance the deal, Avast is taking on a lot of debt. What is the company’s debt-to-EBITDA multiple, do you know?

I know you’ll be talking to Vince Steckler (CEO of Avast) in the next half hour. That would be a really great question for him.

What will your role become in the new company?

I will continue to manage through the integration. I will stay on post-integration for a period of time to help with the transition, then I will move on from the combined entity.

Over what period time? And do you have any ideas about what you might do after that?

Ah, I always have ideas for what I’m going to do next. Nothing that I’ve disclosed yet. I would expect it to be a minimum of six months.

Why should shareholders and regulators approve the deal?

The combined company will be much stronger. We’ll pour much more money into innovation. We’ll be able to provide much more protection, which is really critical for consumers today because it’s highly fragmented and they’re at risk. In the end this will be a very good deal. Hopefully, it will get speedy approval. We’re in an industry with desktop that’s in decline—consistent decline at varying rates quarter-on-quarter. We’re also in an industry where, while users are adopting mobile devices, mobile hasn’t really been monetized yet. There isn’t a clear business model. It requires a new approach for companies like ours. That is going to require more resources, more cash flow, and faster moving. In an industry with 25 to 27 competitors all trying to do same thing on the platform of desktop, which is actually in decline, there are going to be a number of companies that just don’t make it. It’s far better to do something proactively than to have something done to you.

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